The smart money is getting out of property. The smart money has long regarded property to be treated like any other commodity, to be bought and sold whenever the time is right.
There are, of course, many successful investors who having bought a property rarely perhaps never sell. But the difference between what they buy and what others buy is the timing of the purchase. They bought at a time when ‘the world and his wife’ were not into property. Times like that are few and far between.
Buying income? Investors in pursuit of income should not buy property. It’s not that property cannot produce an income. It can and often does, unless your choice of investment was so unwise that the property is unlet. But the gross yield, the return on capital is a measure of the risk. The higher the yield the greater the likelihood of default and/or no rental growth. Which means that the chances of getting your money back are remote.
That is, unless, investment market sentiment for yield regardless continues to overpay for anything that produces an income. In which case not losing out is simply a matter of avoiding getting lumbered when the music stops. Really that’s more about trading. Nothing wrong with trading, of course: just don’t kid yourself into thinking it’s investment.
The difference between investment and trading is not the duration of the ownership. The difference is what to buy in the first place. Investment is about becoming better off than you are now. Better offer after all costs, tax, and inflation. Thinking that when money can be borrowed at low interest rates and used to buy higher yielding property investments is a no-brainer is generally symptomatic of investors with no brains. That’s not how smart investors think. Smart investors buy when the market is quiet or bought when it wasn’t the thing to do and sell when the market is over-excited and everyone is buying.
Much of that is lost on the average investor. The average investor only reads the headlines, they only see what they want to see, only listen to what they want to hear. Every property belongs to someone but not every property performs. At every level, from institutions with other people’s money burning a hole in the property fund manager’s pocket, to a chap down the road on a shoestring budget, the phrase “one born every minute” is personified as ‘not the best decision made’ that is invariably expressed whenever things don’t pan out as envisaged.
Every so often, I am contacted by wishful-thinking landlords wanting my advice on the best way to get an increase in rent, either at rent review or on expiry and renewal. Whenever I sense the landlord’s expectations are unrealistic, I have to be polite in declining involvement because, as a professional adviser, it is proper behaviour to do so but let me tell you I find it fascinating just how daft some people are when it comes to what they buy. Rather, what they’ve spent borrowed money on.
A typical misapprehension is in seriously thinking the tenant would want to be helpful. That situation is especially common when the tenant is a multiple retailer or large company. Generally, such tenants are completely indifferent to the probability that the capital valve of the landlord’s investment would be down-valued if the tenant won’t agree to something that the landlord considers fair and reasonable.
Unlike residential property buy-to-let when generally the landlord is in control, and generally tenants are subservient, tenants of commercial property are wised up and often more substantial and better advised than the landlord. Although it’s patently obvious that many tenants won’t stand any nonsense from what the tenant considers an unrealistic expectation, where inexperienced landlords go wrong is in thinking that the tenant cares anything like as much as about the property as does the landlord.
The smart money doesn’t get sentimentally attached. Having weighted up the pros and cons, having identified the pitfalls in the making, it is simply a matter of leaving something for the next man for the next man to fall for it hook line and sinker. With so much cash washing around the property system looking for income, demand is likely to continue unabated. Provided you remember it’s not demand for property fundamentals and are agile enough to get out while the going is good, the chances of coming unstuck in the next property crash are remote. If you don’t care a jot about the possibility of the buyer overpaying through misjudging the proposition then you’re on the road to becoming a smart investor.
The Rent Review Specialist